Senate Leaders Accept Tax Bill Changes

WASHINGTON — Senate Republican leaders, unable to defend their sweeping tax revision package against an unusual political alliance, went along with an amendment Tuesday night to change the bill to increase medical deductions and aid farmers at the expense of foreign investors.

But the Senate protected the bill against other assaults from different directions, keeping a $500-million tax break for the steel industry on an early Wednesday morning 65-29 vote, agreeing to put an end to a tax preference for federal retirees, and retaining a special tax break that would save $2 million in taxes over five years for just two individuals.

In a key 57-42 vote, the Senate defended the bill against an amendment that would have kept a current tax provision that allows public employees to receive the first three years of their pension without paying income taxes. The bill would require federal retirees and others who contribute to their own pensions to begin paying some taxes upon retirement, beginning in 1988. The amendment would have boosted taxes an average $63 on about 20 million higher-income taxpayers to preserve the tax preference for public employees.

Sen. John C. Danforth (R-Mo.) passionately defended the bill against the proposal. "Once you say 'yes' to one group," he argued, "you can never say 'no' again."

Metzenbaum Victory

Sen. Howard M. Metzenbaum (D-Ohio), continuing his crusade against several so-called "transition rules," won a surprising victory by persuading the Senate to retain a tax currently imposed on foreign investors who buy and sell U.S. real estate.

The bill written by the Finance Committee would have repealed the tax, but the Senate voted 80 to 18 to apply the $1.2 billion raised by retaining current law to allow farmers to use income averaging and to increase medical deductions that could be taken under the bill.

Sen. Malcolm Wallop (R-Wyo.), who fought the amendment, charged his opponents with spreading "disinformation," and accused critics of an "absolute lie" that the bill was opening a huge new tax break for foreigners.

As originally written, the bill would have eliminated income averaging for all taxpayers, and changed the tax code to allow individuals to deduct only those medical expenses that exceed 10% of their adjusted gross income. Under current law, medical expenses are deductible above 5% of adjusted gross income.

Metzenbaum's amendment would apply $1 billion over five years to lower the 10% floor under medical deductions, but he did not specify what level would apply.

Mine Owners' Provision

Earlier, however, Metzenbaum lost when he went after a tiny provision in the tax package that would allow two unidentified owners of a Colorado mining company to save $2 million by continuing to pay capital gains taxes at the current top rate of 20% on sales of coal to a power plant instead of facing the higher 27% tax rate that would apply to other investors under the new bill.

Sen. William L. Armstrong (R-Colo.) defended the tax break, arguing that it was not fair to change the tax rules on a fixed-price contract. Metzenbaum, however, said millions of other taxpayers who also were suffering some kind of loss did not have any unique provision to protect them against changes in the tax code.

"What we're talking about is two people versus 230 million," Metzenbaum said.

The vote to retain the tax break was 68 to 13.

Investment Profits

Meanwhile, Sen. Alan Cranston (D-Calif.), in a move aimed at shoring up his reelection campaign against Rep. Ed Zschau (R-Los Altos), briefly introduced an amendment to maintain the current low tax rate on profits from investments held more than six months. After a mild debate on the issue, Cranston withdrew the proposal before a vote.

Both Cranston and Zschau are competing for campaign money among the wealthy high-tech entrepreneurs in California who value the low capital gains rate as a lure for investment in their risky ventures. The race for the Senate seat currently held by Cranston is expected to cost more than $15 million.

"Now, more than ever, American industry and business needs individual entrepreneurs willing to take on extraordinary risks," Cranston said. "And these individuals are motivated, in part, by the potential for great rewards if they are successful."

Zschau's spokesman, James LeMunyon, said the congressman welcomed Cranston's effort to maintain the investment preference but said that Cranston is "not going to out-capital gains Ed Zschau. High-tech is our bread and butter."